Last week I suggested that the Ibanez case of faulty mortgage documentation in Massachusetts was something of a tempest in a teapot. I wasn’t alone in downplaying the effects but a couple of pretty smart people have put forth some arguments that make me, at least, a bit less sanguine.
John Carney argues that while the court left the banks in the case with room to cure the issues, that might be easier said than done. He makes a good point that repapering the transactions while simple in concept might be difficult given the vicissitudes of human nature and the disappearance of firms via bankruptcy that would be vital to recreating the chain of title.
Adam Levitin does a thorough legal analysis of the issues raised by the decisions and comes to this conclusion:
Which brings me to a critical point: Ibanez and Harp involve mortgage chain of title issues, not note chain of title issues. There are plenty of problems with mortgage chain of title. But the note chain of title issues, which relate to trust law questions, are just as, if not more serious. We don’t have any legal rulings on the note chain of title issues. But even the rosiest reading of Ibanez cannot provide any comfort on note chain of title concerns.
So who loses here? In theory, these loans should be put-back to the seller. Will that happen? I’m skeptical. If not, that means that investors will be eating the loss. This case also means that foreclosures in MA (and probably elsewhere) will be harder, which means more delay, which again hurts investors because there will be more servicing advances to be repaid off the top. The servicer and the trustee aren’t necessarily getting off scot free, though. They might get hit with Fair Debt Collection Practices Act and Fair Credit Reporting Act suits from the homeowners (plus anything else a creative lawyer can scrape together). And mortgage insurers might start using this case as an excuse for denying coverage. REO purchasers and title insurers should be feeling a little nervous now, although I doubt that anyone who bought REO before Ibanez will get tossed out of their house if they are living in it. Going forward, though, I don’t think there’s a such thing as a good faith purchaser of REO in MA.
OK, maybe this gets a bit messier than I thought. Based on Levitin’s analysis it would appear that there is room for legal shenanigans than I perceived. If they can make a buck off of debt collection and fair credit reporting issues it will draw more of them into the fray. I didn’t see that much of a profit motive for the attorney class at first glance. And, Carney is right, the practical issues involved in putting these things right could loom large.
In the end it gets solved. The alternative isn’t acceptable. We may find some imposed legislative solution less than palatable but if things do spiral downward that’s where we will likely end up. In the meantime the day of market clearing and return to some semblance of a healthy residential real estate market just keeps getting pushed out.
Update: Arnold Kling poses a useful question with regard to the foreclosure mess:
For the current situation, however, the issues are quite difficult. When I was in Boston, I used to joke about why they needed no-fault auto insurance. The way they drive up there, a typical accident is going to have both parties at fault. When a guy going the wrong way down a one-way street hits a guy making an illegal left turn, who do you blame?
Now, you have borrowers who may have committed fraud to obtain a mortgage and are no longer paying the mortgage. You have servicers who did not properly file documents with the record office to update the noteholder of record. Which side deserves the right to the property?
His short post is worth a quick read.